Highwoods Properties(HIW) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, management's discussion and analysis, and market risk disclosures Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for Highwoods Properties, Inc. and Highwoods Realty Limited Partnership for the period ended June 30, 2021 Highwoods Properties, Inc. Financial Statements For the six months ended June 30, 2021, Highwoods Properties, Inc. reported net income of $118.7 million, a decrease from $230.3 million in the prior year period, primarily due to lower gains on property dispositions | Financial Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $5,237.0M | $5,209.4M | | Total Liabilities | $2,741.2M | $2,738.7M | | Total Equity | $2,367.6M | $2,358.2M | | Cash and cash equivalents | $6.5M | $109.3M | | Income Statement (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Rental and other revenues | $185,502 | $183,153 | $369,307 | $375,953 | | Net income | $61,844 | $38,956 | $118,699 | $230,296 | | Net income available for common stockholders | $59,305 | $37,028 | $113,764 | $222,501 | | Diluted EPS | $0.57 | $0.36 | $1.09 | $2.14 | | Cash Flow (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $197,415 | $180,215 | | Net cash provided by/(used in) investing activities | $(228,417) | $129,729 | | Net cash used in financing activities | $(99,809) | $(310,979) | Highwoods Realty Limited Partnership Financial Statements The financial statements for Highwoods Realty Limited Partnership are substantially similar to those of Highwoods Properties, Inc., reflecting the consolidated nature of the business | Financial Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $5,237.0M | $5,209.4M | | Total Liabilities | $2,741.2M | $2,738.7M | | Total Capital | $2,338.8M | $2,329.3M | | Income Statement (in thousands) | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Rental and other revenues | $185,502 | $183,153 | $369,307 | $375,953 | | Net income | $61,844 | $38,956 | $118,699 | $230,296 | | Net income available for common unitholders | $60,929 | $38,045 | $116,881 | $228,478 | Notes to Condensed Consolidated Financial Statements The notes detail significant accounting policies and events, including a planned $769 million acquisition, a $131.3 million joint venture interest acquisition, and property sales - The company agreed to acquire a portfolio of office assets from Preferred Apartment Communities, Inc. (PAC) for an expected total investment of $769 million[67] - In Q1 2021, the company acquired its joint venture partner's 75% interest in the Highwoods DLF Forum, LLC, which owned five buildings in Raleigh, for a purchase price of $131.3 million[75] - During H1 2021, the company sold a building in Tampa for $43.0 million and a building in Atlanta for $30.7 million, recording combined gains of $41.8 million[76] - In Q1 2021, the company entered into a new $750.0 million unsecured revolving credit facility, replacing its previous $600.0 million facility[80] As of June 30, 2021, $155.0 million was outstanding, with $594.9 million of unused capacity[80] - A cash dividend of $0.50 per share of Common Stock was declared on July 27, 2021, payable on September 8, 2021[111] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial performance, strategic initiatives, and liquidity, including the impact of COVID-19 and a planned $769 million acquisition Executive Summary The executive summary outlines Highwoods' strategy, notes the continued impact of COVID-19 on property usage, and reports a slight decline in office portfolio occupancy to 89.5% - The company's strategy is to own and manage high-quality workplaces in the Best Business Districts (BBDs) to help customers attract and retain talent[121] - Occupancy in the office portfolio decreased from 90.3% at December 31, 2020 to 89.5% at June 30, 2021[124] Average occupancy is expected to be 89% to 90% for the remainder of 2021[124] | Second Gen. Office Leases (Q2 2021) | New Leases | Renewal Leases | Total | | :--- | :--- | :--- | :--- | | Leased Space (sq ft) | 323,022 | 575,538 | 898,560 | | Average Term (years) | 6.6 | 4.9 | 5.5 | | GAAP Rents (per sq ft) | $29.03 | $29.98 | $29.64 | - Annual combined GAAP rents for new and renewal leases signed in Q2 2021 were 8.9% higher compared to previous leases in the same spaces[127] - Same property Net Operating Income (NOI) was $0.2 million (0.2%) lower in Q2 2021 compared to Q2 2020[130] Results of Operations For Q2 2021 versus Q2 2020, rental revenues increased 1.3% due to acquisitions and development activity, while a significant $22.5 million increase in gains on property dispositions drove diluted EPS up to $0.57 - Q2 2021 vs Q2 2020: - Rental and other revenues increased by $2.3 million (1.3%) primarily due to acquisitions and development properties placed in service[144] - Gains on disposition of property were $22.5 million higher[151] - Diluted EPS increased to $0.57 from $0.36[153] - Six Months 2021 vs 2020: - Rental and other revenues decreased by $6.6 million (1.8%) primarily due to lost revenue from property dispositions[154] - Gains on disposition of property were $111.6 million lower, mainly due to the 2020 market rotation plan of exiting Greensboro and Memphis[161] - Diluted EPS decreased to $1.09 from $2.14[163] Liquidity and Capital Resources The company maintains strong liquidity with a 37.3% leverage ratio and $594.9 million unused credit capacity, planning to fund a $769 million acquisition through non-core asset sales - The company plans to fund its acquisition from PAC by accelerating the sale of $500 million to $600 million of existing non-core assets by mid-2022[174] - During Q2 2021, the company issued 149,100 shares of Common Stock under its equity distribution agreements, receiving net proceeds of $6.8 million[177] - The company prepaid the remaining $150.0 million principal of its 3.20% unsecured notes that were scheduled to mature in June 2021[178] | Capitalization Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Mortgages and notes payable, net | $2,475.9M | $2,470.0M | | Market value of Common Stock and Units | $4,835.4M | $4,231.0M | | Total capitalization | $7,340.1M | $6,729.8M | | Leverage (Debt + Preferred to Assets) | 37.3% | N/A | Non-GAAP Information This section provides reconciliations for non-GAAP financial measures, including Funds from Operations (FFO) and Net Operating Income (NOI), showing FFO per share flat at $0.93 for Q2 2021 | FFO per Share | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | FFO available for common stockholders | $99,541K | $99,168K | $197,002K | $197,941K | | FFO per share | $0.93 | $0.93 | $1.84 | $1.86 | | NOI (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net operating income | $129,276 | $128,034 | $256,892 | $258,632 | | Same property net operating income | $122,898 | $123,104 | $244,610 | $245,793 | | Same property cash net operating income | $119,593 | $107,646 | $237,876 | $219,556 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk with $2.13 billion in fixed-rate debt and $305.0 million in unhedged variable-rate debt, where a 100 basis point rate increase would impact annual interest expense by $3.1 million - At June 30, 2021, the company had $2,133.8 million of fixed-rate debt and $305.0 million of unhedged variable-rate debt[208][209] - A 100 basis point change in the weighted average interest rate on variable-rate debt would increase or decrease annual interest expense by $3.1 million[209] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of the end of the period, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the disclosure controls and procedures for both the Company and the Operating Partnership were effective at the end of the quarter[214] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[215] PART II - OTHER INFORMATION This section provides information on unregistered equity sales, executive changes, and a comprehensive list of exhibits Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2021, the company issued 1,000 shares of Common Stock to redeem an equal number of Common Units from the Operating Partnership in a private offering exempt from registration - In Q2 2021, 1,000 shares of Common Stock were issued to holders of Common Units upon the redemption of a like number of Common Units[218] Item 5. Other Information The company announced that Executive Vice President and CFO Mark F. Mulhern will retire effective January 1, 2022, and will be succeeded by Brendan C. Maiorana - Mark F. Mulhern, EVP and CFO, will retire on January 1, 2022[220] - Brendan C. Maiorana, currently EVP of Finance and Treasurer, will assume the role of EVP, CFO, and Treasurer upon Mr. Mulhern's retirement[220] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including incentive plans, purchase and sale agreements related to the PAC transaction, and CEO/CFO certifications - Exhibits filed include the 2021 Long-Term Equity Incentive Plan, Purchase and Sale Agreements with PAC, and Sarbanes-Oxley Act certifications[222]